Businesses worry as 20% tax on foreign loan interest to be back

Businesses with foreign loans stand to face an additional burden of around Tk1,500 crore annually as their 20% tax exemption on interest payments expires this month, increasing their cost of doing business and further diminishing their competitiveness.

Entrepreneurs fear this will stifle industrialisation and choke foreign currency inflows amid the reserve crisis.

In the FY24 budget, a 20% source tax was initially levied on interest payments for foreign loans. However, in response to requests from businesses, its implementation was deferred until 31 December of this year.

An official from the National Board of Revenue (NBR), on condition of anonymity, told The Business Standard, "The likelihood of extending this tax exemption beyond December is very low. As a result, from now on, tax will be collected at the normal rate of 20% on interest payments for offshore loans."

He added that when the exemption was granted, the NBR suggested local borrowers to discuss the tax on interest with their financiers in advance. According to the NBR's calculations, collecting tax at the normal rate could generate an additional Tk1,500 crore from this sector.

Fresh discussions about collecting tax on interest of foreign loans have raised concerns among borrowing institutions and banks.

DBL Group, a leading business conglomerate in the country, has over $100 million in foreign loans across four companies.

MA Jabbar, managing director of DBL Group, told TBS, "Given the current challenging business environment, additional taxes will further reduce our profitability, which could hinder industrialisation and employment."

However, NBR officials explain that the tax will be levied on the income of the institutions receiving the interest, meaning foreign lenders will bear the burden. If borrowers negotiate effectively with financiers, they believe there should be no issue.

Industrialists, however, argue otherwise. MA Jabbar said, "When a 20% tax is imposed, foreign institutions will raise loan interest rates to maintain their net income, ultimately passing the increased cost onto us."

Bankers share the concerns of businesses. Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS, "If the tax rate is increased, access to foreign loans will become more difficult. Foreign institutions will pass this tax onto their customers.

"We have lagged behind in negotiations due to Bangladesh's downgraded credit rating, negative outlook, limited currency availability, and rising costs. In this context, the additional taxes will further increase the cost of doing business."

Why do businesses take foreign loans?

Businesses take foreign loans because the interest rates are usually lower compared to domestic bank loans, which currently range from 11% to 15%. In contrast, interest rates on foreign loans are tied to the Secured Overnight Financing Rate (SOFR), which is currently between 4.60% and 5.10%, with an additional 2-3% added by financiers, bringing the maximum rate to 8%.

However, entrepreneurs say foreign loans are not easily accessible unless companies pass the Environmental, Social, and Governance (ESG) audit.

MA Jabbar, also president of the Bangladesh Economic Zones Investors' Association, argued that the cost of compliance to secure such loans could be discouraging and increasing taxes on foreign loans could deter compliance and reduce foreign currency inflows during the reserve crunch.

Shams Mahmud, managing director of Shasha Denims and former president of the Dhaka Chamber of Commerce and Industry, explained, "It is difficult to secure long-term loans from some local banks, and the private sector is currently facing trouble to access loans. In this context, foreign loans offer an opportunity for sectors like agro, RMG, infrastructure, and engineering at a reasonable rate."

He added that if local banks easily provided loans, it would be logical to discourage foreign borrowing. However, the current reality makes foreign loans essential for private sector growth and job creation.

Additional pressure on businesses during tough times?

A multinational company in Bangladesh with a foreign loan of $4.5 million faces an interest payment of Tk2 crore.

The head of the company's finance department, speaking on the condition of anonymity, told TBS, "An additional 20% tax would add around Tk40 lakh to the cost. With reduced profitability, this added burden could lead to losses and worsen currency pressure."

Rupali Chowdhury, former president of the Foreign Investors Chamber of Commerce and Industry (Ficci), told TBS, "Given the current difficulties businesses are facing, many companies are struggling to pay salaries and dividends. Imposing additional tax pressure in this situation is illogical."

BSRM, one of the country's largest business groups and foreign loan recipients, also expressed concerns. On 11 December, Shekhar Ranjan Kar, general manager and company secretary, sent a letter to the NBR's Income Tax Policy Member.

"Businesses in Bangladesh are under significant financial pressure due to economic constraints, including fluctuating foreign exchange rates, rising input costs, restricted access to local financing, and delays in receiving confirmations from foreign banks for our deferred letters of credit (LCs)," reads the letter. 

"As a result, the tax obligation on interest payments for foreign loans worsen our financial strain, making it increasingly difficult to manage these loans while maintaining our commitment to sustainable operations and employment generations."  

Experts suggest proper negotiations with lenders 

Snehasish Barua, managing partner of Snehasish Mahmud and Company and a tax expert, told TBS, "The IMF is also pressuring to move away from the culture of tax expenditure. Therefore, a borrower in Bangladesh needs to secure the loan from a country with which Bangladesh has already signed a Double Taxation Avoidance Agreement."

"This will effectively reduce the withholding tax rate substantially. They also need to negotiate with the lender, as the lender may claim treaty relief on the taxes being withheld," he said.

The tax expert added that since the government of the respective country has agreed to pay some taxes in Bangladesh through the Double Taxation Avoidance Agreement, they should not object to being taxed proportionately on their income earned from Bangladesh.